Wednesday, May 21, 2014

Perils of Investing in Cuba

Perils of Investing in Cuba
[21-05-2014 12:04:03]
Pedro Roig
Historiador y Abogado

( The Economist, a respected magazine,
portrays Cuba's new Foreign Investment Law as an "economic
liberalization," adding the subjective judgment that the regime is
becoming "less communist." (1) The Economist is calling on foreign
companies to trust the Cuban leadership and invest in Castro's
impoverished island. Yet these opinions do not fit the facts or the
policies of the Castro government. First and foremost, the Cuban
Constitution is the active and prevailing law of the island. It frames
and controls the Cuban legal system.
1. Cuba's Constitution: An Investor's Nightmare?

Written in 1976, and extensively revised in 1992 and later in 2002, the
Constitution clearly defines the power vested in the Communist Party.
Article 5 states that "the Communist Party is the superior leading force
of the State." Article 3 of the Constitution adds that the socialist
system "shall be irrevocable and Cuba will never return to capitalism."

As a communist regime, the national economy is centralized, planned and
run by the State (Article 9). It is also based on a socialist ownership
of the means of production (Article 14). These laws are specific and a
prevalent part of Cuba's legal system. They have not been set aside by
the new Foreign Investment Law.

The communist constitution does not allow room for doubts on the issue
of property ownership rights. On the contrary, it is clear, direct and
precise. It states that "sugar mills, factories and all enterprises,
banks and installations that have been nationalized and expropriated
from imperialists, large estate owners and the bourgeoisie" (Article 15)
are the property of the state.

The State controlled legal system in Cuba fails to protect foreign
investors. Judges and lawyers are not independent and follow party and
military orders. A recent example is the arrest 3 years ago of Cy
Tokmakjian, a Canadian investor that has been languishing in jail
without trial. On April 30, 2014, Peter Kent, Chairman of the Canadian
House of Commons Defense Committee, complained publicly about the arrest
of Mr. Tokmakjian and criticized Cuba for not protecting foreign
investors. (2)

The Economist praise of Cuba's new Foreign Investment law is an absurd
misinterpretation of the island's prevailing legal system. Factually,
General Raul Castro's military oligarchy is no "more liberal" or "less
communist." The Economist's baseless praise is without merit.

The issue is that General Raul Castro is opening for business but in his
own communist terms. The second problem for potential investors is that
Cuba's physical infrastructure is moving rapidly from acute decay to
fatal collapse.

2. Deteriorated Roads, Bridges and Railroads

The island's roads and bridges are unsafe and in need of urgent repair
and the state lacks the needed funds to make the repairs. The fatigue,
cracking and exacerbated deterioration of the bridges and roads are
caused by low quality materials combined with inconsistent repair
practices. As noted by a relevant study, "the lack of investment and
maintenance are reflected in the deteriorated condition of the
transportation system." (3) In addition, hundreds of bridges throughout
Cuba are in need of rehabilitation. (4)

In the global market, trucking is a vital commercial component and the
decay of the national highway system presents a major obstacle for the
safe and timely transportation of commercial cargo.

Cuba's railroad system suffers from multiple infrastructure problems
including rotten cross beams, rusted rails and loose tie plates. The
dilapidated conditions of the railroad grid demand that in some areas
the trains go at a maximum of 20 km an hour to avoid accidents. (5)
Railroad bridges are also in precarious conditions with sinking
foundations that disrupt the angles on the tracks. (6) Railroads are
excellent forms of moving bulk commodities in cargo such as sugar and
minerals. The task of repairing the infrastructure is beyond Cuba's
financial capacity. The acute deterioration of the transportation system
is among the perils of investing in Castro's Cuba.

3. Inadequate Ports With Mariel as the Exception

With the exception of the mega transshipment Port of Mariel, with a
draft up to 49 feet and a capacity to store over 3 million containers,
Cuba's principal ports (Havana, Matanzas, Santiago de Cuba and
Cienfuegos) are unable to accommodate large, modern vessels.

Experts have pointed out that in Cuba's ports "all basic
infrastructures, including connectivity to ground transportation
networks, energy, telecommunication and water have suffered. All such
systems are antiquated, unreliable and incapable of supporting the
demands associated with a consumer-oriented economy." (7)

The U.S. Trade Commission stated that the ports' poor maintenance has
created a situation where loading and unloading cargo can be a hazard.
Furthermore, there is limited availability of cold storage, a crucial
infrastructure component necessary for perishable food products. In
addition, the availability of equipment and trucks used for moving loads
on to and off the ports is inadequate and they lack spare parts needed
for repair and maintenance.

The modern Port of Mariel, just 45 km West of Havana, is designed to
serve super-container ships. However, the future possibility of serving
as a container transshipment facility for a U.S. (post-embargo) commerce
has major competition from high-tech Port of Miami, the closest American
port to the new Panama Canal expansion. The Port of Miami enlargement
has a dredge of up to 50 feet in depth and is capable of berthing even
the largest container vessels in the world, including the future Maersk
Triple E Class, which will have a draught of 47 feet and will be nearly
200 feet wide.

The mega Port of Miami has completed an under the bay tunnel for trucks
to bypass Downtown Miami, doubling the port's traffic capacity. So, why
would the Pacific exporters choose the Port of Mariel if they could
bring their cargoes directly into the U.S. via the excellent highway
infrastructure of the Port of Miami? This fact should be a major concern
for the Port of Mariel investors.

Source: Perils of Investing in Cuba - Misceláneas de Cuba -

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